Why Americans are no longer free spenders

WASHINGTON (MarketWatch) — Faster job creation and cheaper gasoline were supposed to encourage Americans to spend more in 2015, fostering the strongest U.S. growth in a decade.

So much for that. Five months into the year, the U.S. is still expanding far below its 3.3% historic average, largely because of start-and-stop spending by American households that’s responsible for almost 70% of the nation’s economic activity.

Consider: The annualized increase in retail sales, adjusted for inflation, fell to a 13-month low of 1.75% in March, St. Louis Federal Reserve data show.

Meanwhile, overall spending by consumers has risen at an inflation-adjusted 2.3% quarterly pace since the recovery began in mid-2009. That’s just two-thirds as fast as the U.S. average since 1947.

The reluctance of consumers — not only in the U.S. but around the world — to spend more has caught many by surprise.

“Something has gone wrong with the global consumer,” economists at J.P. Morgan wrote in their weekly survey.

The cautious response by U.S. households is viewed as particularly puzzling. Interest rates are super low, the stock market is at an all-time high, home values have recovered and consumer confidence recently hit an eight-year peak. With layoffs at an all-time low and the unemployment rate tumbling to 5.4%, Americans also feel much more secure in their jobs.

And yet, every time Americans start to spend more freely, they soon hunker down. The savings rate climbed to as high as 5.7% earlier this year from 4.4% last fall, and it’s much higher than the 3% average in the year before the Great Recession began.

So what’s behind tepid spending?

Stretched to the limit

“Household budgets are still tight. People don’t have much money to throw around,” said Greg McBride, chief financial analyst at Bankrate.com, an online financial-research firm. Whatever extra money they get is “chewed up by higher rent, groceries, car repairs, the trip to the doctor.”

The chief executive of Wal-Mart
WMT, -0.65%
, the nation’s largest retailer, echoed that view after disappointing first-quarter results.

“Household budgets are still tight. People don’t have much money to throw around.”
- Greg McBride, Bankrate.com

“We know that many of our U.S. customers are using their tax refunds and the extra money from lower gas prices to pay down debt or put it into savings,” CEO Doug McMillon said Tuesday. “They’re also using these funds for everyday expenses like utilities and groceries.”

A new survey by Bankrate found that only 14% of Americans used the cash saved by cheaper gasoline to increase spending on so-called discretionary items such as dining out or going to a movie — the kind of spending that’s like icing on a cake. The rest either don’t drive, pocketed the savings or spent it on necessities such as housing and groceries.

The Bankrate poll is the latest in a string of surveys and reports that highlight the unwillingness of Americans to ramp up spending, at least for more than a few months.

A survey by credit-card giant Visa, for example, found that three-quarters of households plan to use gas savings to pad their bank accounts or pay off debt.

Another report by the Federal Reserve indicates Americans cut credit-card debt in the first quarter by the biggest amount in four years.

Similarly, a recent Gallup poll shows more Americans are shunning plastic. Some 29% of consumers said they had no credit cards vs. 22% in 2008.

Cost of living

The desire to save more or to keep spending in check shouldn’t come as a shock.

Even with a nearly 50% plunge in gas prices, Americans aren’t benefiting much aside from savings at the pump. Most companies haven’t cut prices even as their own energy bills have shrunk.

The cost of major household expenses such as food, housing and medical care, for example, are rising at the same rate or even faster since the decline in gas prices. Rising college debt has also become a heavy burden for parents or newly graduated students entering the workforce.

Nor are workers benefitting from bigger paychecks or more buying power even with an influx of new jobs. Wages and salaries are only growing slightly faster than inflation — and a still-high 17 million Americans who want a full-time job can’t find one.

No wonder about half of all U.S. household say they are still worried about money even though the economy has improved, another Gallop poll finds. That’s much higher compared to a decade ago.

The fragile financial health of households helps explains why the economy is performing well below par entering the sixth year of recovery. The U.S. has grown about 2% since it exited recession and there’s little sign it’s about to sharply accelerate.

Nevertheless, most economists are sticking to their guns. They predict U.S. growth will bounce back and that consumers will spend more in the months ahead. After all, that’s what their models tell them.

But most models have been repeatedly wrong over the past five years and the against-the-type behavior of consumers is a chief cause. The psychological and pecuniary scars of the Great Recession — the most devastating downturn in decades — apparently haven’t faded away.

“The irony here is that for years consumers were chided for spending too much and saving too little,” Moody said. “Now they’re saving more which, for some observers, is a seemingly mysterious plot twist.”

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